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Customs-based FCA violations on the Rise

The 2015 Fiscal year ended on Sept. 30, 2015, and for the fourth consecutive year, the Department of Justice (DOJ) has exceeded $3.5 billion in cases under the False claims Act (FCA). Since 2009, to the end of the most recent fiscal year, settlements under the FCA have brought total recoveries to approximately $26.4 billion. The FCA is the government’s most effective civil tool to ferret out fraud and return billions to taxpayer funded programs. Although FCA recoveries historically have been attributable in large part to cases involving allegations of fraud in connection with health care programs and government procurement, a new trend is emerging. Recently, a variety of international trade rules and regulations are serving as the basis for FCA suits. Companies operating in the international trade arena should be aware of this new trend and take steps to shield themselves against potential liability for international trade transactions.

While the international trade community has not been immune to the FCA, it has been able to somehow fly below the radar of FCA suits. However, recently private litigants and the DOJ have increasingly been bringing cases under the FCA to penalize false and fraudulent statements allegedly made during the import process. This is in addition to the administrative penalties imposed by the U.S. Customs and Border Protection (CBP). As a result, importers are facing potential additional liability for actions based on customs violations, which can result in substantial statutory damages.

The FCA is a particularly powerful enforcement tool as it allows for treble damages and penalties, and because FCA claims can be initiated by private qui tam plaintiffs, known as relators, or more informally whistleblowers. The ability of a private individual to bring action on behalf of the government and the financial incentive that accompanies a qui tam suit is a key factor behind the growing use of the FCA to prosecute customs violations. Violations may be met with civil penalties of up to $11,000 per false claim (e.g., per customs entry) and three times the government’s actual damages. Furthermore, a provision added to the FCA in 1986 allows a whistleblower who files a lawsuit on behalf of the government based on their knowledge of corporate malfeasance to receive up to 30 percent of any penalties awarded. This 1986 provision has led to more investigations and recoveries, with the number of qui tam suits filed in fiscal year 2015 reaching 638, and recoveries totaling $2.8 billion when combined with earlier filed suits this past year. Whistleblower awards during this same period totaled $597 million.

Whistleblowers are also presented with what might be called a target-rich environment due to the prevalence of undervaluation, false origin marking, and other fraudulent practices so attractive because of the potential windfall they offer. There are still some products, such as textiles and apparel, which are subject to high U.S. import duties, and it can be a tempting proposition to use unscrupulous means to take advantage of a free trade agreement or other tariff lowering program. The U.S. also remains a vigorous user of anti-dumping and countervailing duties that can exceed 300 percent or more, giving foreign manufacturers who produce or ship products from countries that are frequently targets of such charges more than enough reason to try to find a way around them.

The FCA prohibits knowingly making false or fraudulent claims for payment from the U.S. government. It also allows for so-called “reverse” false claims, which seek to recover damages resulting from false or fraudulent conduct that causes a person or company to conceal, avoid, or reduce payments due to the government. This “reverse” false claim theory is most commonly used in the international trade field. Under this theory, a person may institute a reverse false claims action against an importer alleging that false or fraudulent statements by that importer caused it to pay less duties than it should have paid. This is different than the standard FCA claim where instead of misrepresenting information to gain more money from the government the “reverse” false claim deals with the misrepresentation of information to pay less money to the government.

Reverse False claims in the import context have played out in a variety of situations. The most commonly alleged type involves an allegation that an importer has misrepresented the country of origin of imported items therefore avoiding payment of anti-dumping or countervailing duties. A perfect example to show the government’s expansion of the use of FCA to trade and export violations is the case involving a Japanese company Toyo Ink SC Holdings Co., Ltd. and its affiliates including companies in New Jersey and Illinois (collectively, “Toyo”). This case was brought forward by a qui tam lawsuit filed by one of Toyo’s domestic competitors, John Dickson. Toyo agreed to pay $45 million to settle the FCA qui tam suit brought by the competitor alleging that they knowingly failed to pay anti-dumping and countervailing duties by misrepresenting the country of origin. Dickson as the whistleblower was able to recover nearly $8 million from the final settlement.

On February 12, 2015, the DOJ announced that three U.S. importers had agreed to pay more than $3 million to settle a lawsuit brought by the United States under the FCA, while alleging that the companies engaged in schemes to evade customs duties on imports of aluminum extrusions from the People’s Republic of China (PRC). The allegations resolved by the settlement were originally brought by whistleblower James. F. Valenti under the qui tam provision of the FCA. Valenti received a little bit more than $500,000 dollars in his share of the settlement.

In addition, a U.S.-based importer paid $4.3 million, and the whistleblower received $830,000, for allegations that the importer knowingly undervalued imported merchandise into the United States and made other false statements in documents submitted to the CBP. Also, a third importer paid $1.2 million, and the whistleblower received $252,000, for allegations that the importer knowingly engaged in a double invoicing scheme, pursuant to which imports were undervalued and incorrectly described, resulting in the importer paying less than 10 percent of the duties and fees payable to CBP.

All signs point to a continuing trend of customs-based FCA claims, and it seems to be gaining momentum. Virtually any international trade compliance lapse that results in the failure to pay the full amount owed to the U.S. government can lead to claims of FCA liability. Because of this, importers should be aware of the government’s unprecedented commitment to pursuing FCA claims and the whistleblower’s opportunity for pecuniary gain which incentivizes individuals to bring qui tam suits. The increase in FCA lawsuits based on customs violations should put International trade companies on alert. As a result, import/export companies operating in the international trade realm must make sure to establish procedures and practices to ensure declarations made to CBP in connection with those activities, are accurate and complete.

Thanks to my former law clerk, Luis Torres, for his assistance writing this article.